Savings rates are negative

Last week I complained about captive media commentators acting as conduits for Reserve Bank of Australia spin.

I also highlighted the investment plight of numerically superior “savers" and, more pointedly, the mounting proportion of retirees watching their deposit-linked incomes being decimated by the RBA’s “emergency" policy settings.

One of my esteemed stablemates, Ross Gittins, published a follow-up column called “the truth on interest rate", arguing the “grey power lobby" had no grounds to fault the RBA’s relentless rate cuts. Gittins alleged “savers ought to be the last people whingeing about the way events have transpired . . . They’re laughing all the way to the bank."

Beyond proposing that savers were doing fine, Gittins predicted that the major banks’ depositors would not bear the full brunt of the cut passed on to mortgagors, and said savers had generally done better than borrowers in this easing cycle.

Sadly for those long on cash and short on debt, Gittins is wrong.

The RBA has, of course, tried to convince the community that its 175 basis points worth of “pre-emptive" rate cuts are not really in response to any emergency. But hard data tells another story. On the subject of who got what, Kirsty Lamont, of rate watcher mozo.com.au, says: “ANZ, CBA and NAB slashed their savings rates by the full 25 basis points. Westpac have yet to announce their decision." Yet the majors have only shaved borrowing rates by, on average, 20 basis points. On this score, savers have suffered.

The next issue is whether rates are low relative to where they have been. Is this a “new normal" or extreme, and perhaps foolhardy, stimulus?

According to RBA data, the average three-year, fixed-rate home loan is the cheapest it’s been since records begin in 1990. The “standard variable" rate is also just above the 40-year low of 2009 when the RBA expected unemployment to soar to 8 per cent.

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The cost of credit in Australia has been more expensive than current levels in 95.5 per cent of all months since 1980.

What about savings rates? Are depositors laughing all the way to the bank, as Gittins thinks?

There are three types of deposits: “transactional accounts" that offer little to no return; “variable-rate" savings accounts that broadly track the RBA cash rate; and “fixed-rate" term deposits priced off longer-run money market expectations.

The RBA reports a monthly estimate of the average “online" variable savings rate since 2004. During the global financial crisis this hit a nadir of 3.15 per cent.

Care of 150 basis points of rate relief before the RBA’s December meeting, the online deposit rate had slumped back to 3.3 per cent.

Given three of the four big banks have dropped savings rates by 25 basis points, the average online rate is now likely lower than it has ever been. It will, in fact, be almost two percentage points less than the average 5 per cent rate that has been offered since 2004.

Another variable deposit product the RBA follows is the standard “cash management account". The benefit of this series is that it goes back to 1989. For sums up to $50,000, the 1.9 per cent rate in November was already the lowest on record. It is also less than half the average 4.8 per cent rate since 1989.

Economists like to talk about “real" savings rates after stripping out inflation or the cost of living. If we deduct core inflation from the RBA’s savings benchmark, we find that real rates are now negative. To be clear, this is not a normal event if history is any guide.

As my chart shows, it is only the third time in 23 years that Australians have been slugged with negative real savings rates. The current minus 0.4 per cent return is the lowest it’s ever been, aside from the tumultuous period between December 2008 and December 2009. Compared with the average 2 per cent rate since 1989, contemporary savers are getting a terrible deal.

What about term deposits? In November the average 12-month term deposit rate was 4.25 per cent. Since 1993 the average has been 5.2 per cent (the average since 1981 is a stonking 9.4 per cent). Once again, term deposits are giving us much less than they have in the past.

Have savers done better than borrowers during this easing cycle, as some maintain? RBA data tells us that online savings and cash management rates have been reduced by a total of 1.8 points and 1.95 percentage points respectively since October 2011.

In contrast, “standard" and “discounted" variable home loan rates have only fallen by 1.35 and 1.4 percentage points. So no cigar for savers here either.

What makes the RBA’s decision especially galling for retirees is that it has imposed “recessionary rates" on them based on questionable forecasts. RBA research bluntly concludes it cannot reliably predict growth, unemployment or inflation over the medium term.

What we do know is that the jobless rate fell from 5.4 per cent to 5.2 per cent in November despite the RBA projecting it would be 5.5 per cent or higher. We also know that growth has been “around trend" for the past year while inflation has expanded at a healthy pace. The evidence suggests the economy is doing OK, notwithstanding the rent-seekers baying for cheap money.

A final media myth is that retail savers benefit from rates superior to even wholesale investors . Beyond being theoretically illogical given deposits rank ahead of the banks’ senior and subordinated creditors (and should, therefore, give lower returns), this is practically erroneous too.

In the past week, ANZ raised $750 million via a floating-rate bond that paid the top end of town a 5.3 per cent rate. AMP Bank also issued a $150 million bond to a select number of institutions, which will earn a whopping 6.2 per cent. The bottom line is that banks like deposits because they are the cheapest source of funding they have.